Can Capitation and Consumerism Play Together?

Capitation is no longer a dirty word. It's an important component of moving healthcare reimbursement toward value. How can provider organizations get there?

Years ago, capitation became a dirty word.

It was a term used concurrently with the equally dirty acronym HMO, which got its reputation in the '90s from the perception that such organizations sacrificed medically necessary care on the altar of cutting healthcare costs, no matter the method. Undeniably, those practices included denying claims and care for members in a blunt attempt to save on healthcare expenditures, and earned HMOs their negative reputation.

Maybe it wasn't the ideas of capitation and managed care that were poor, though, just the execution. In some parts of the country, such as California, capitation has never fallen out of favor. Furthermore, the tools that were available to manage care in the '90s were rudimentary compared to the modern data-crunching abilities of organizations that control the premium dollar. Now, with sharper insights from better use of claims and other data, capitation seems broadly possible again on more than a regional scale.

At its heart, capitation is the opposite of fee-for-service, in that it incents economically rational behavior that considers cost as an important part of the care equation. As such, capitation is an important component of moving healthcare reimbursement toward value, say many experts. Access to data about populations, then, will be key to reaching a "fair" capitation rate.

If some form of capitation is the endpoint of healthcare reimbursement transformation, as the HealthLeaders Media Intelligence Report on "Payer-Provider Strategies: New Rules for Facing Risk Together" suggests, how can providers move incrementally toward preparation for success in that landscape without upsetting their finances to such a degree that the organization itself and its many funding needs are compromised? Incremental movement seems necessary, as healthcare providers must smooth the transition between two models that are economically diametrically opposed.

Diane Holder, CEO of UPMC Health Plan in Pittsburgh, served as lead advisor for our payer-provider research report. Her organization receives more than $5.5 billion a year in total capitated dollars across employer payment, Medicare, and Medicaid. "The industry is not flipping overnight from fee-for-service to capitation en masse," she said in the report. "That just isn't going to happen. What people are struggling with is the glide path in moving from volume to value."

So how can consumerism and capitation work together?

Deductibles are getting ever higher for people covered by commercial plans. All healthcare consumers are limited by what's available in their HSA, if they have one, and beyond that by the cash in their bank accounts to pay their deductibles and coinsurance. That puts pressure on providers to compete on price, at least in many areas of healthcare that are elective.

But it doesn't put much pressure on the upper reaches of claims—that is, those expensive services that most often occur once the deductible is met. Consumers aren't doing much shopping in those areas. That's where better care management, better transitions, better data, and, yes, capitation, can make a big difference on costs.

Smart healthcare organizations are learning these lessons from the employer point of view.

Kimberly Boynton, president and CEO of Crouse Hospital in Syracuse, NY, told me prior to the HealthLeaders Media CEO Exchange this fall that this area is where hospitals and health systems are uniquely positioned to innovate. On one hand, hospitals and health systems are providers of healthcare. As some of the largest employers providing full medical benefits, however, they're also consumers. Crouse is investing in wellness by making sure each employee has a primary care physician, and that they're getting well visits, diagnostic testing, and placement into disease management programs where appropriate.

"We're starting [these] with our own employees because they will pay off in the long term," Boynton says. "We've hired additional people, we've made IT investments, and we've hired coaches for disease management that we're paying for that we didn't in the past. Our plan is we start with them and get together a program that we can take to other employers."

While not a form of capitation, the injection of high-deductible health plans to the mainstream offers a lot of lessons on what value will look like in healthcare, as well as the kinds of programs needed to limit healthcare cost increases as near as possible to the actual rate of inflation.

As has always been the case, providers will struggle to get a piece of that premium dollar. But under capitation, instead of counting on ever-rising prices for units of service, hospitals, health systems and physician groups will have to learn how to keep patients healthier, and thus in lower-cost settings, to keep a greater portion of that dollar. Who has control of how that dollar is divided is still obviously a huge issue, but with price and quality transparency, that can be worked out. Some health systems are turning to technological partners to get smarter about the changing dynamics, and to help bridge the transparency gaps between employer, patient, and provider.

"We have some large provider systems as customers," Kristin Torres Mowat, vice president of strategic alliances and data operations at Castlight Health, told me in an interview. Castlight helps self-insured employers manage healthcare spending and benefits administration through a variety of technological tools. "These health systems are taking an expansive view of their changing world and participating in these programs to give them a competitive advantage in their markets and even reach beyond if they are already value-based."

Will experimenting with your own employees on capitation and value-based healthcare actually provide a competitive advantage? It's debatable, especially as the competition shifts from other hospitals or health systems to a variety of competitors, including national drugstore chains, supersized payers, and venture capital-based startups. But it will be a clear competitive disadvantage not to try.